Nicholas Watson in Prague -

The huge success of the IPO of Transgaz by the Romanian government last year had investors hoping for more, but the country's continuing political deadlock looked to have delayed any more privatisations until after the parliamentary elections set for the end of 2008. So the announcement on February 7 that the government intends to sell part of the giant Property Fund by the end of the year came as a pleasant surprise.

The head of the Fondul Proprietatea, a closed-end fund set up in December 2005 to compensate Romanians who didn't get back property that had been confiscated by the communists, told newswires he expects a stake in the fund to be listed on the Bucharest Stock Exchange at the end of this year. "If things go well, we predict the listing of the fund at the end of 2008," board president Emanoil Negut told a news conference.

Negut said a 20-30% stake in the Property Fund might be listed on the stock exchange, but the Finance Ministry, the majority shareholder in the fund, had yet to make a decision.

However, the legacy of the politicking that went into the whole creation of the fund could yet put a spanner in the works.

Cash or shares

The Romanian government had planned to list the fund in 2007, but its by-laws were only approved in the middle of last year after lengthy and heated talks between the various parties. While few disputed the necessity of the fund to compensate people who had their assets seized by the communists, the mechanism for pricing and allocating the shares, as well as the make-up of the assets in the fund, were hotly contested.

In the event, what was finally agreed was that the reimbursement procedure should involve the beneficiaries of restitution being given the option to choose between receiving cash (but not more than RON500,000, or €136,000, in two instalments), receiving Property Fund shares for the entire amount, or a mix of the two.

From November 20, the state began making cash reimbursements, using as the main financial source the dividends received by the Finance Ministry from the Property Fund, which came to about €7.3m. As the value of cash reimbursement applications significantly exceeded this amount, the government had to chuck in another €9m. In terms of people taking up shares in the fund, by December 3,028 had opted for shares, bringing their stake in the Property Fund's share capital to 11.26%, with the remaining stake in the hands of the state.

The by-laws also stipulated a significant improvement of the portfolio held by the Property Fund. The original portfolio included many loss-making enterprises alongside the stakes in prized companies such as Petrom (the country's largest oil company that was recently taken over by Austria's OMV), Romtelecom (in which Greece-based OTE has 51%) and Transelectrica. "Some of these companies do not meet the fund's purpose - there are some loss-making companies and some of them are even close to bankruptcy," the previous head of the fund conceded to bne in an interview last year. "We were not consulted when the portfolio was created."

The new agreement weeded out many of the dogs and increased the stakes in the gems - the stake in Petrom, for example, grew from 10.22% to 20.11%. At the end of December, the Property Fund had three major stakes in listed companies, namely Petrom, Transelectrica and Transgaz, worth €1.9bn. "We estimate that the value of the funds' assets is at least €6bn after the government increased a few main stakes from its portfolio," say analysts at Erste bank.

This makes the fund of crucial importance to the Bucharest stock exchange, as it will be the largest institutional investor on the local market. The fund will also be able to invest outside Romania, but restricted to European equities. As such, the government is obliged to hire an international asset management firm to administer the fund; in January, it announced it had begun the process of selecting a consultant to choose that fund manager and draw up the fund's investment policy.

Nonetheless, last year's deal was a messy compromise and analysts say the fund is still largely opposed by the Social Democrats, the biggest opposition party, who believe it isn't an adequate mechanism for reimbursing people for lost assets. Meanwhile, the minority government of Prime Minister Calin Popescu-Tariceanu has its hands full staying alive and fending off criticism from the EU, which on February 4 rebuked Romania and its neighbour Bulgaria for failing to crack down sufficiently on high-level corruption and organised crime.

"Given the political instability and low support from the Social Democrat Party for the Property Fund as a solution for reimbursing ex-owners, there is a major question mark regarding a reliable deadline for launching the public offer," Erste Bank said before Negut's announcement. "Under these circumstances, we do not expect the offering to take place earlier than in 2009, when Romania will have a new government as a result of the parliamentary elections scheduled for November 2008."

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